Analyzing Project Risk Due to

Deposit Grade Variation

Bruce H. Van Brunt
Qualifications: BA Geology (University of Colorado-Boulder)
MS Mining Engineering (Mackay School of Mines)

Currently: Principal Consultant

Reserve Development International

Memberships/Other Roles: SME

Contact Details: Reserve Development International

2425 Park County Road 72 Bailey, Colorado 80421 USA
Tel: 303-816-1108 Fax: 303-838-3571
Email : resdevintl@prolynx.com

Abstract

In spite of the advances in computer software for mine planning and the
advances in sampling techniques for reverse circulation drilling, the most
significant threat to the economic feasibility of a developing gold mining project
remains misinterpretation of the grade. Several examples from industry
publications support this statement.

Conditional simulation, a technique in existence since the mid-1970's, can

provide the input necessary to answer many of the questions about feasibility risk
due to grade. Unlike interpolation techniques, conditional simulation models
honor the variance of the input data and are therefore excellent models to use for
production planning purposes.

Using conditionally simulated models as input, Whittle's Four-X software package

may be used as a transfer function, allowing the mine planner to quantitatively
measure the project risk due to grade.

Introduction

Over the past 20 years the gold mining industry has benefited from numerous
technological advances in processing, drilling, and the computerization of
planning exercises. Over this time frame, metal prices have fluctuated from high
to low. And yet, for all of its achievements and through the wildest of price
variations, the gold mining industry still suffers the greatest losses of capital
invested due to the misinterpretation of the grade of the deposit.

Bruce H. Van Brunt – Analyzing Project Risk Due to Deposit Grade Variation
Whittle North American Strategic Mine Planning Conference, Colorado, August, 2000
No shortage of data exists to support the above claim, the first set of examples is
drawn from Warren (1991). In his 1988 study, Warren compared the feasibility
study forecasts against the first 12 months actual gold production for 32
Australian mines (Appendix 1). He concluded that only 34% of the mines
achieved production levels that equaled or exceeded the feasibility forecasts, a
failure rate of 66%.

Baker (1999) conducted a similar study on gold mines in Australia in 1996/1997

comparing the stated reserve grade at the beginning of the year and the average
grade mined for the following 9 to 12 months. The results of his study are
presented in Figure 1.

This paper focuses on the use of

conditional simulation as a tool to New Celebration
Jundee
assess three critical components of Mt. Morgans

the feasibility study, sensitivity Red Dome

Union Reefs
analysis, the confidence in reserves, Plutonic

and time to capital payback. Gwalia

Nimary
Yilgarn Star
Grade Variation - Do I have a Boddington

problem? Bluebird
Kidston
Macraes Flat

All mineral deposits have a built in Mt. Muro

Tanami Mine
component of variance in their grade Copperhead
distribution. Depending upon the Big Bell

type of deposit the degree of Paddington

Granites
variability in grades increases or Sunrise Dam

decreases relatively (Figure 2). If Kanowna Belle

Lihir
mineral deposits had uniform grade Lawlers

distributions about their mean the Yandan

problem of ore versus waste -100 -50 0 50 100 150

discrimination would become very Deviation from stated reserve grade (%)

simple since ore-waste boundaries

would be much more apparent. In Figure 1: Reserve Grade Variation to Production
fact, a small amount of variance in Grade (from Baker and Giacomo, 1998)
grades is a good thing because it
allows miners to impose cut-off
grades to impure deposits and select the higher value per ton material from the
incrementally negative valued material.

Figures 2, 3, and 4 (Hanson, 1997) clearly present the general nature of the
variance problem by deposit type. Figure 2 shows the general variation of deposit
type and grade. Figure 3 imparts a relative degree of difficulty in modelling the
various deposit types. And Figure 4 shows the general tendencies of the primary
geostatistical tool for measuring variance, the variogram. In Figure 4 the range of

Bruce H. Van Brunt – Analyzing Project Risk Due to Deposit Grade Variation 2
Whittle North American Strategic Mine Planning Conference, Colorado, August, 2000
the variogram becomes shorter with lower deposit continuity, and the nugget
effect becomes greater with decreasing deposit continuity.

1ppm Diamond Pipe

Low
30ppm Alluvial Vein Au
Volc. Au/Ag
0.1% Porph.Mo
Porph.Cu Vein Sn/W
1%
Stratiform Sn
Stratiform Ni
10% Stratiform Pb-Zn
Proportion
Volc. Cu Pb Zn
Ore
Mineral
30%

Bauxite
60%
Iron Ore

100% Coal
High

High Geological Continuity Low

Figure 2. Typical deposit type grade concentration vs. geologic continuity.

1ppm Diamond Pipe

Low
30ppm Alluvial Vein Au
Volc.. Au/Ag
Volc Au/Ag
0.1% Porph.Mo
Porph.
1%
Porph.Cu
Porph .Cu
Stratiform Sn
More Vein Sn
Sn/W
/W

10%
Stratiform Ni
Stratiform Pb-
Pb-Zn Difficult Proportion
Volc.. Cu Pb Zn
Volc
Ore
Mineral
30%
Less
Bauxite
Difficult
60%
Iron Ore

Coal
100% High

High Geological Continuity Low

Figure 3. Generalized degree of difficulty in modelling various deposit types.

Bruce H. Van Brunt – Analyzing Project Risk Due to Deposit Grade Variation 3
Whittle North American Strategic Mine Planning Conference, Colorado, August, 2000
 1ppm
Low
30ppm
0.1%
1%
More
Difficult
10% Proportion
Ore
Mineral
30%
Less
Difficult
60%

100% High

High Geological Continuity Low

Figure 4. General variogram behavior by deposit type.

A simple example illustrating the difference between interpolation and conditional

simulation follows using blasthole data from a Nevada mine. Figure 5 shows the
layout of the blastholes, with higher grades positioned to the north along a
general NW trend. Note that very low-grade material is intermingled with the
high-grade material.

The first step in any resource evaluation should be to examine the data quality
(sampling and assaying) and basic statistics of the element grades involved. A
great deal can be learned about a deposit by simply examining the histogram
and cumulative distribution function (CDF) of the grade variable. In general, gold
grade distributions with coefficients of variation (CV's) greater than 2.0 warrant
special treatment such as indicator transformation prior to interpolation, and a
good rule of thumb is to try and subdivide the populations based on geology until
CV's are in the 1.0 - 2.0 range at a maximum.

Figure 6 presents the histogram for the blasthole data. On the basis of CV
(1.101) this data is quite manageable by ordinary kriging. The histogram is a
positively skewed grade distribution tending toward lognormal. Note that the
high-grade tail of the distribution is not smooth.

Figure 7 presents a log-log scale CDF plot of the data. A lognormal distribution
would plot as either a straight line (2-parameter lognormal distribution) on this
graph, or as a straight with a curve on the low-grade end (3-parameter lognormal
distribution). This plot indicates that more than one population is present as
demonstrated by the inflection in the plot near the grade of 0.035 opt gold.

Bruce H. Van Brunt – Analyzing Project Risk Due to Deposit Grade Variation 4
Whittle North American Strategic Mine Planning Conference, Colorado, August, 2000
Figure 5. Blasthole data.

Figure 6. Gold grade histogram Figure 7. Gold grade cdf plot

Bruce H. Van Brunt – Analyzing Project Risk Due to Deposit Grade Variation 5
Whittle North American Strategic Mine Planning Conference, Colorado, August, 2000
 Figure 8. Gold grades on 2.5' x 2.5' grid as a result of Multiple Indicator Kriging.

Figure 9. Gold grades on 2.5' x 2.5' grid as result of Sequential Indicator Simulation.
Bruce H. Van Brunt – Analyzing Project Risk Due to Deposit Grade Variation 6
Whittle North American Strategic Mine Planning Conference, Colorado, August, 2000
Figure 10. MIK vs. blasthole data QQ plot. Figure 11. SIS vs. Blasthole data QQ plot.

Mixtures of populations are common occurances in databases, especially for

blasthole data where too often not enough geologic information is collected. In
fact, at this particular deposit, higher grade mineralization is structurally
controlled, and lower grade mineralization is lithologically controlled. One
possible solution for treating this data would be to divide it at 0.035 opt gold and
use an indicator function to try and delimit the extent of the high grade
population. Although quick, this methodology fails to account for the fact that
more often than not the two populations overlap.

Figure 8 presents a map of the area of interest displaying gold grades kriged
onto a 2.5' x 2.5' grid using a multiple indicator (MIK) technique. The high grade
zone is quite extensive and very coherent, so it would be easy to imagine an ore
control engineer developing a 0.025 opt gold polygon for treatment as ore. Figure
9 presents a map over the same area, using the same data, with the same
indicator cut-offs, but in this case applying a single conditional simulation using
the sequential indicator algorithm (SIS). Comparison of the MIK and SIS results
suggests that the ore control engineer might have lower grade ore than
expected, with considerable more internal dilution present in the SIS results than
was predicted by the MIK.

The difference between the MIK and SIS results is futher examined in Figures 9
and 10, quantile-quantile (Q-Q) plots comparing the results with the original
grade distribution. Figure 9 shows significant smoothing of the original
distribution in the MIK results, where Figure 10 indicates that the SIS technique is
capable of reproducing the original distribution very well. Fundamentally these
differences are related to the designed output from each of the two algorithms.
All interpolation algorithms are designed to give a single estimate, where as
simulation techniques are meant to model variance.

Bruce H. Van Brunt – Analyzing Project Risk Due to Deposit Grade Variation 7
Whittle North American Strategic Mine Planning Conference, Colorado, August, 2000
To answer the question about whether or not variance will present a problem in
your dataset you should answer the following questions:
v Do one or more of the grade variables in the dataset have a high CV?
v Does the CDF plot of the grade variables indicate a mixture of geologic
populations?
v Has any statistical analysis been performed on the data in the block
model that will be used for pit optimization? Is the model biased?

If the answer to any of these questions is 'Yes' then there is justifiably cause for
concern on your part.

Project Sensitivity to Grade

The reduction in revenue from a failure to realize the reserve grade can be
catastrophic because of the non-linear relationship between gross revenue and
net revenue. Since assays and reserve estimates are both imprecise, some
method of predicting the likely impact on cash flow must be used. One of the
most common methods of analysis is the spider diagram. Although grade is not
measured directly, Four-X does vary price and recovery in the calculation of
spider diagrams, and for certain projects the results are the same. The question
is what are reasonable limits for grade sensitivity?

Park (1999), Rozman (1998), and Gray (1999) suggest the values shown in
Table 1. Given that the shape of most gold grade distributions is roughly
lognormal using a symmetric range as Gray suggests or the triangular
distribution that Rozman suggests appears unrealistic. Park's suggestion of only
using -10% would appear to be the most realistic if not the most conservative.

Table 1 Likely sensitivity ranges

Reference Lower Upper
Park (1999) -10%
Rozman (1998) -1% +15%
Grey (1999) -10% +10%

The purpose of using conditional simulation is to generate several equiprobable

realizations of a grade for a given location. Over a grid or block model each set of
grades is different but they all share the same histogram, variogram, and honor
the conditioning data. For a given grid node or block the various grade
realizations generated produce a likely range of grades for that block. This
concept may be expanded to the scale of phases or pits, in which case a likely
range for sensitivity has been quantitatively determined.

Bruce H. Van Brunt – Analyzing Project Risk Due to Deposit Grade Variation 8
Whittle North American Strategic Mine Planning Conference, Colorado, August, 2000
When designing the analysis process that will be presented for the project
sensitivity in the feasibility study, the mine planner will benefit by keeping the
following questions in mind:

v What are the reasonable upper and lower limits (% of grade) to be used?
v Should these limits be symmetric about the mean grade?
v Should the limits be the same for each deposit?
v What is a rational way to assess the upside potential for a project with
respect to grade?

Methodology for Modelling Risk

Geostatistical conditional simulations are becoming standard industry tools for

the evaluation of uncertainty and therefore risk. This is accomplished by building
a model of the deposit that reproduces faithfully the full histogram and variogram
of the conditioning data. Therefore, these models honor the spatial variability of
the deposit as represented by the existing data. Some of the more important
aspects of building the conditional simulation models have been published
elsewhere, including among others Rossi (1999), Rossi and Van Brunt (1997),
and Goovaerts (1996).

Multiple simulations (models of the

deposit) are possible because of the
random nature of the stochastic
(Monte-Carlo) process involved in
developing each simulation. In the
case study developed below, 11
simulations were obtained. These 11
simulations represent the possible
range of grade values for each block.
The set of possible grades for each
block is in fact a probability function
curve, and is all that is needed (under
the model) to evaluate risk. Not only E-
type estimates can be obtained (as an
average of the simulations, in theory
equating to kriging), but also
probabilities of exceeding or not
exceeding thresholds. Typically it is
more useful to use probability intervals
as measures of risk. In layman terms, Figure 12. Transfer function and risk
these probabilities are sometimes modelling.
expressed as “confidence intervals”; in a
strict sense, they describe the range of
values (minimum and maximum) that under the model chosen represent the
intervals. upper and lower boundaries of probability For example, one would say,
for an individual block, that there is an 80% probability that the block true,

Bruce H. Van Brunt – Analyzing Project Risk Due to Deposit Grade Variation 9
Whittle North American Strategic Mine Planning Conference, Colorado, August, 2000
unknown values are between 0.6 and 1.1g/t. This particular block would be more
“certain” compared to another where the same probability interval may have a
0.2 and 2.0g/t lower and upper bounds. This analysis can be generalized to
specific areas within the deposit, or the deposit as a whole. If each simulation is
passed through a pit optimizer such as Whittle Four-X, then a set of 11
alternative pits will be obtained. This is the Transfer Function described in Rossi
and Van Brunt (1997), and it allows us to measure risk at the mine planning and
mine evaluation stage properly accounting for geologic and grade uncertainty.

Reserve Reporting

Amos (1998) identifies the quantity of reserves and resources as a major factor
governing the level of debt funding available for a project. Amos points out that
the applicant will be disadvantaged if unable to identify and categorize the risk
associated with the reported tonnage and grade.

One objective in using conditionally simulated models as input into Four-X, is to

gain a better understanding of the risk or potential upside in a reported resource
or reserve. Most if not all reserve reporting guidelines have levels of resources or
reserves based on the increasing level of geological data, knowledge of the ore
body, and confidence in the estimate. However none of the American, Australian,
or Canadian reporting schemes which are recognized by the government
securities commissions provide insight to a quantitative measure of confidence to
make the distinction between levels of resources or reserves.

Classification into specific levels of a resource should be made at the block level,
prior to optimization. Most mining companies classify their Reserves and
Resources based on drill hole separation and the number of drill holes within the
search neighborhood, which is used in the interpolation of the block grade.
Although increased drill hole density generally corresponds to increased
confidence it can be easily demonstrated that the grade of the drill hole
composites in the search neighborhood also contributes to the level of
confidence in the block grade estimate. To truly define the confidence in a block
grade and the level of resource classification this possible variation in grade must
me accounted for. An example developed by Van Brunt and Rossi (1999)
presents the difference relative to the E-type estimate in the contained tons and
grade of ore within the mining width adjusted pit shell using simulated copper and
gold values. The values may be considered F1 factors (Rossi, 1999),
representing the anticipated ratio of planned to mined values (Table 2). In an
open pit mine the minimum increment size for expanding a reserve is a minable
phase. These factors are arrived at by simply merging the final pit design with
each of the conditional simulations resulting in ranges of contained metal,
average grades, and ore tonnages.

Bruce H. Van Brunt – Analyzing Project Risk Due to Deposit Grade Variation 10
Whittle North American Strategic Mine Planning Conference, Colorado, August, 2000
Table 2 F1 Total resource factors
Simulations Ore Tons % Cu Grade % Cu Metal % Au Grade % Au Metal % Strip Ratio
Max 104.57 120.55 120.84 124.07 129.74 103.59
Min 97.23 75.66 78.95 89.05 89.02 99.64
Average 100.54 101.50 101.99 100.05 100.66 95.47
Reserve 100.00 100.00 100.00 100.00 100.00 100.00
Model
Range % +4.57 +20.55 +20.84 +24.07 +29.74 +3.59
-2.77 -24.34 -21.05 -10.95 -10.98 -0.36

Time to Capital Payback

An important aspect in securing financing is the ability of the mining company to

demonstrate a certain amount of debt service coverage overall, and in light of
potential downside scenarios. The cash flow coverage in downside scenarios
drive acceptable capital structures and debt capacities in the financing. Downside
multiples may vary between 1.1 - 2.0 of the debt. Base multiples may vary 1.3 to
4.0, dependent upon bank policy, prevailing economic conditions, and other risk.

Figure 13 shows the cumulative undiscounted cash flow over the mine life for the
E-type model based schedule and for all of the individual simulations. The graph
gives a good indication of the potential range in project cash flow by the
magnitude of the vertical spread of the individual lines at the end of the E-type
planned mine life in year 13. The graph also gives a good indication of the
likelihood of payback occurring when anticipated from the E-type schedule by the
magnitude of the horizontal spread of the cash flows when crossing the zero
cumulative cash flow gridline. This type of graph is developed by combining
multiple conditional simulations of the grade (Model File) and a final mine design
(Pit List File) yields the required input (Results File) for scheduling in Four-X.

Conclusions

Risk to cash flow from grade variation is a real problem that will in the future
become more important as miners attempt to profit by mining more marginal
deposits. At present the only modelling technique that reproduces the variance
associated with grade variables is conditional simulation. Conditionally simulated
models can be used in two ways with Four-X. First, the models can be merged
with existing mine designs to evaluate the likely range of contained resource and
mine life cash flow. A second option exists, and that is to optimize the conditional
simulations individually. This approach leads the planner to consider multiple
design alternatives and can help to identify zones of high resource risk.

Bruce H. Van Brunt – Analyzing Project Risk Due to Deposit Grade Variation 11
Whittle North American Strategic Mine Planning Conference, Colorado, August, 2000
 Figure 13. Various capital payback schedules for a single mine design based on
conditional simulation.

Bruce H. Van Brunt – Analyzing Project Risk Due to Deposit Grade Variation 12
Whittle North American Strategic Mine Planning Conference, Colorado, August, 2000
Table 3 Resource information listed by phase from Van Brunt and Rossi (1999)

Bruce H. Van Brunt – Analyzing Project Risk Due to Deposit Grade Variation 13
Whittle North American Strategic Mine Planning Conference, Colorado, August, 2000
References

Amos, Q.G., 1998, 'Resources and Risk-The Lender's View', in Ore Reserves
and Finance, a joint seminar between AusIMM and ASX, Sydney, Australia June
15, 1998.

Baker, C.K., and Giacomo, S.M., 1998, 'Resources and Reserves: Their Uses
and Abuses by the Equity Markets', in Ore Reserves and Finance, a joint seminar
between AusIMM and ASX, Sydney, Australia June 15, 1998.

Grey, S., 1999, 'Uncertainty and Corporate Strategy', in Conference Proceedings

of 'Strategic Mine Planning-A Financial Perspective', Australian Journal of
Mining.

Hanson, N., 1997, 'Towards a Broader View of Cut-off Grade in Resource

Estimation and Reserve Reporting', AusIMM Resource to Reserve Input
Seminar, September 9, 1997, Melbourne, Victoria, Australia.

Park, A., 1999, 'Project Financing (Feasibility Studies - What Financiers Are
Looking For)', in Conference Proceedings of 'Strategic Mine Planning-A Financial
Perspective', Australian Journal of Mining.

Rossi, M.E., and Van Brunt, B.H., 1997, 'Optimizing Conditionally Simulated
Orebodies With Whittle 4D', in Conference Proceedings of 'Optimizing With
Whittle 1997', April 8-9, 1997, Perth, WA.

Rossi, M.E., 1999, Using Meaningful Reconciliation Information To Evaluate

Predictive Models, Preprint 99-20, SME Annual Meeting, March 1 – 3, 1999,
Denver Colorado.

Van Brunt, B.H., and Rossi, M.E., 1999, 'Mine Planning Under Uncertainty
Constraints', in Conference Proceedings of 'Optimizing With Whittle 1999', March
23-24, 1999, Perth, WA.

Warren, M.J., 1991, 'Pre-feasibility and Feasibility Studies: A Case for

Improvements', Mining Industry Optimisation Conference, Sydney, Australia,
June 5-6, 1991.

Bruce H. Van Brunt – Analyzing Project Risk Due to Deposit Grade Variation 14
Whittle North American Strategic Mine Planning Conference, Colorado, August, 2000
Appendix 1: The recovered grade data (g/t Au) presented by Warren (1991).

Project Estimate Actual % Change

Kidston 1.84 1.80 -1.9
Reedy 4.00 3.77 -5.7
Great Victoria 3.60 2.19 -39.2
Nevoria 5.46 5.00 -8.7
Mt. Percy 3.53 2.45 -30.6
Paddington 3.20 2.88 -9.8
Sons of Gwalia 3.11 3.62 16.5
Porphyry 4.67 3.65 -21.7
The Granites 6.64 6.31 -5.0
Bluebird 4.15 2.70 -34.9
Harbour Lights 5.16 3.12 -39.5
Horseshoe Lights 4.75 3.34 -29.8
Bamboo Creek 9.33 8.10 -13.2
Wiluna Tailings 0.54 0.54 0.0
Lawlers Tailings 1.23 1.16 -5.9
King of the Hills 4.96 4.80 -3.2
Pine Creek 1.65 1.95 18.7
Canbelego 2.20 1.79 -18.6
Westonia 3.13 2.69 -14.2
Golden Crown 23.93 21.14 -11.7
Galtee More 6.22 3.93 -36.8
Cracow Tailings 1.00 0.83 -16.7
Cork Tree Well 2.64 2.35 -11.1
Great Eastern (Lawlers) 4.28 4.00 -6.4
Croydon 2.28 0.95 -58.1
Lady Bountiful 3.81 2.92 -23.4
Brilliant-Tindals 3.08 2.54 -17.6
Broad Arrow 3.39 2.24 -33.9
Mt. Martin 6.91 4.92 -28.8
Gwalia Tailings 0.65 0.53 -18.0
Howley Alluvials 0.47 0.29 -37.4
Hawkins Find 1.24 1.03 -17.6

Arithmetic Average 4.03 3.32 -17.1

Number of Projects 32

Bruce H. Van Brunt – Analyzing Project Risk Due to Grade Variation 15

Whittle North American Strategic Mine Planning Conference, Colorado, August, 2000